Profit distribution

What it means

Profit distribution is the decision about what happens to the after-tax result: part may go to the reserve fund, part to cover prior-year losses, part to the members as a profit share, and the rest stays undistributed.

The general meeting decides, on the basis of approved annual accounts. Until then the profit is part of equity and is payable to nobody.

Deciding to pay nothing is also a distribution decision: keeping the result as retained earnings is a general meeting resolution too and belongs in the minutes. Profit kept that way can be distributed in a later year, not only the result of the latest period, provided it is not needed to cover a loss.

How it works in practice

The sequence is fixed: approve the accounts, then resolve on the distribution, then pay. The resolution goes into minutes, which serve both the bookkeeping entry and the tax administrator.

Only distributable profit may be paid out - after the mandatory transfer and after covering accumulated losses. It is also checked that the payment will not endanger the company’s ability to meet its obligations.

When a profit share is paid to an individual the company withholds withholding tax and remits it; we prepare the calculation, the notice for the tax administrator and the entry for the liability to the member. With a member resident in another country, the double tax treaty and proof of tax residence are also reviewed before the money leaves.

What to watch out for

Retained profit is not "spare cash": it may be locked in stock and receivables. Paying members without looking at cash flow is the shortest route to a liquidity problem the following month.

Profit is shared in proportion to ownership stakes unless the articles of association say otherwise. An unequal split with no basis in the articles can be challenged by the other members, and a payment made before the accounts are approved is not a profit share at all: the member must repay it, and meanwhile the books carry a receivable that needs explaining.